Insurers’ hidden ‘loan’ costs: how much interest are you being charged to pay monthly?

The cost of insuring your car can differ wildly not just according to your chosen provider – but depending on how you pay.

Paying for your insurance in monthly installments, rather than a one-off annual payment, can mean a difference in price of hundreds of pounds. But with premiums at an all-time high, particularly for young drivers, paying in instalments can be the only option.

Where customers opt to pay monthly, the insurer effectively issues a loan for the policy, with repayments spread over the course of the year and interest charged on top. The rate charged differs hugely from company to company, according to consumer group Which?

Age UK, for example, offers interest-free credit; while esure charges 27.8pc APR.

In its annual results, released last week, esure, which has just over half a million customers, revealed it made £22m in the first half of 2017 from its customers paying in instalments. Direct Line meanwhile brought in a staggering £56m.

To consumers, the addition of interest can boost the cost a policy by well over £100.

Paying monthly for insurance | How much are you being charged?

When you opt to make monthly payments for your insurance you enter into a credit agreement with the company.

This means you will pay interest, and the rate charged differs wildly between companies. Here are 10 examples.

Company APR (pc)
Age UK 0
NFU Mutual 0
Direct Line Varies
Tesco Bank 29.9
The AA 26.9
Hastings Direct 14.9
Esure 25.4
Aviva 22
LV 24.9
Churchill Varies

Telegraph Money searched for quotes for a male driver in their mid-20s on a popular price comparison website. Admiral charged £165 more to pay monthly, while the difference with Esure was £132.

A spokeswoman for the Association of British Insurers said insurers offer the option to pay monthly to help those who cannot afford an annual premium.

She added: “Insurers have to follow the same strict rules as all lenders, which means customers must always be given details such as the cost of their monthly installments and the total amount they will eventually pay.”

Gareth Shaw, a money expert for Which?, said it was important not to focus solely on cost when looking for your policy.

“There’s a risk of saying the cheapest is the best but it’s important to have a provider that will deliver for you,” he said. “We analyse more than 50 different elements of a policy and we base that on surveys of consumers.

“The very top of the list is the interest charged on monthly instalments. Other important things are no-claims discount protection if you have a crash which isn’t your fault and cancellation fees.”

He said drivers were often prompted to pay monthly as they could not afford to pay up front. The savviest shoppers will put the full annual premium on a 0pc-interest credit card and pay that off monthly – avoiding a high APR.

Among other large insurance companies, Legal and General charge an APR of 23.9pc, Tesco Bank 27.1pc Churchill 25.9pc, and Aviva 22pc.

A spokesman for Direct Line said the APR was 21.4pc. He added that the costs to serve customers paying monthly were higher, and the APR is not always an indicator of how much more you will pay.

SOURCE http://www.telegraph.co.uk/insurance/car/insurers-hidden-loan-costs-much-interest-charged-pay-monthly/